LAUSD’s financial probe of Magnolia broadens to six more charter schools

Los Angeles Unified School District officials said Monday they have expanded their financial probe of a charter school organization to include all eight locally operated institutions after moving to shut down two learning academies because of fiscal problems.

District officials are not disclosing the findings in an earlier audit that prompted them to decide to close Magnolia Science Academy 7 elementary school in Van Nuys and Magnolia Science Academy 6 in Los Angeles a few weeks ago. Both schools had outperformed their district-run peers in the classroom.

Magnolia Science academies under review include two San Fernando Valley schools: MSA1 in Reseda and MSA2 on Victory Boulevard. The district’s audit will also look at MSA3 in Carson, MSA4 in Venice, MSA5 in Hollywood and MSA8 in Bell.

On Thursday, district lawyers will argue in court against Magnolia’s request for a restraining order that would stop district officials from shutting down academies 6 and 7. Magnolia will seek a permanent injunction while it appeals the district’s decision through county and, perhaps, state education agencies.

In court documents, district officials allege an audit they commissioned of the two academies shows their management organization, Magnolia Educational and Research Foundation, meets the IRS’s definition of “insolvency,” because its net assets were at a deficit of nearly $1.7 million for the fiscal year ending June 2013, according to the district’s summary of the audit it paid Vicenti, Lloyd & Stutzman LLP. to conduct.

Magnolia officials, meanwhile, enclosed a letter from an auditor they hired, Onisko & Scholz, LLP, in court filings, which put Magnolia’s assets at $4.8 million for the fiscal year ending June 30, 2013. Partner Joseph Onisko wrote, Magnolia “is certainly solvent and liquid and has the ability to successfully fund the operations of its schools,” according to the letter that was filed in court.

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A second accounting firm’s findings, Hill, Morgan and Associates, LLP. also refuted the district’s contentions, Magnolia officials contend in court documents. Magnolia’s chief executive officer, Mehmet Argin, sent a letter to district officials on July 3, 2014 saying that his accounting firm has never raised issues of “potential insolvency.”

“Our auditors, Hill, Morgan and Associates, LLP, a very reputable Certified Public Accounting firm who audits numerous California charter schools have issued ‘clean’ (unqualified) opinions every year of our operations and have never issued any comments regarding potential insolvency of any of our operations,” Argin wrote in the letter to district officials.

District officials also raised concerns about fees the school organization paid for immigration services. According to the district’s summary of the audit, Magnolia spent $206,489 on immigration services in the last four years. Tracing back nine of the expenses, auditors concluded that Magnolia paid fees for six people who were not employees of Magnolia, according to the district’s summary of the audit findings.

In response, Magnolia notes that it doesn’t know what expenses the district is referencing, and cannot respond since the district has declined to release the audit. Magnolia officials also wrote that it has records of paying out $43,248 in immigration fees. In two instances, those fees were spent on nonemployees, because those people ultimately weren’t able to obtain work visas, according to Magnolia’s letter.

School board member Steve Zimmer said he expects the district will finalize and publicly release its audit findings when the school board reconvenes from break Aug. 26.

Board members voted to renew charters for Magnolia academies 6 and 7 at the Mar. 4, 2013 meeting with the understanding that should the audit raise any concerns, district employees would return to the board for a decision on the schools’ future.

“What I’ve said is that by at least the August board meeting this has got to be ready to go public, because obviously we can’t shut a school down without a public hearing,” Zimmer said.

Zimmer said while the decision to revoke the charters of Magnolia 6 and 7 without a board hearing was unusual, the district had an obligation to act quickly.

“It puts parents in a horrible situations, but not as horrible if the charters shutdown midyear, if they didn’t have secure financing,” Zimmer said. “That’s certainly a possibility.”